Retirement Saving Tips
Reasons Why You Should Save for Retirement
- Because you don’t want to work forever, and you will ultimately be responsible for paying for your retirement: If you want to stop working one day, you are going to have to think about how much income you will need to live. Social Security provides a basic “floor” of income that you will have to build on for a comfortable retirement. Pensions have provided about 1/3 of retirees with some added income each month. Look for a job that comes with a pension. Others have a savings plan at work. Use it.
- Because you want to have enough money saved for a comfortable retirement: Many people assume that expenses will go down in retirement, but frequently that is not the case. Inflation means you will need more, not less. Higher property taxes could cause your housing costs to be more. You might spend less on clothing, except you’ll have more time to do it! Many other expenses may arise: increased medical costs and health insurance premium costs; financial help for children/grandchildren, or even elderly parents; more free time that could result in more money being spent on traveling and entertainment.
- Because you don’t know how long you will be able to work: The 2007 Retirement Confidence Survey found that 37 percent of current retirees retired earlier than planned due to an unexpected event such as health problems or changes in their company such as downsizing. The earlier you start preparing for unexpected events, the better.
- Because you don’t know how long you will live: People today are living longer. Retiring at age 65 today? A man would have a 50% chance of still being alive at 81, a woman 85. A 25% chance of living to nearly 90. A 10% chance of getting close to 100. How big a chance do you want to take of living longer than you savings lasts?
What is a 401(k) plan?
- It is a retirement savings plan sponsored by your employer and funded by you with money that is deducted from your pretax pay.
- You will be responsible for making the investment choices in your 401(k). Usually, your employer’s plan will offer you a number of investments from which you can choose.
- Sometimes, you will be able to choose from a wider range of options that are offered through your plan’s administrator.
- At this time, you will need to do some research to decide how you want to invest your money – incorporating your risk tolerance and the time horizon in which you want to achieve your financial goals.
Reasons why you should participate in your 401(k) plan:
- It’s easy and convenient: The amount you choose to contribute is automatically deducted from your paycheck. You won’t see the money, so you won’t spend it! Payroll deduction will make it easy for even the most savings-challenged individuals!
- Easy enrollment: If your employer offers a 401(k) plan, then consider yourself lucky – not everyone is offered a retirement plan at work. Since your employer provides all the enrollment materials to get you started on your savings plan, then all you have to do is pick up a pen, fill out the enrollment form, and you’re on your way to saving! Do it!
- You call the shots: With your 401(k) plan, you are the boss. You get to choose how much you want to contribute and where you want to invest your money. You also have the option of changing your contribution amount or transferring money among your investments if necessary. Your 401(k0 statements will make it easy for you to track how much you are saving.
- It will always be your money: Whatever money you contribute to a 401(k) plan is yours -- even if you leave your job. You may have to be vested to be entitled to your company match, but you can still always roll your money into a rollover individual retirement account (IRA) or your new employer’s plan where it can continue to grow tax-deferred.
- Get free money from your employer with a company match: To encourage more employee 401(k) participation, some companies will offer to do a company match. For example, a company may offer to put in another dollar for every dollar you save in the plan, up to 3 percent of your eligible pay. Then, it may add 50 cent for every dollar you put in after that up to 6 percent of your pay. That’s like getting a 75 percent investment return!
- You don’t want to have any regrets 10 years down the line: Saving $20 a week now may seem impossible, but the reality is that you cannot afford not to save. It will always seem challenging to put money aside for your future, but if you don’t take advantage of saving even a little today, you may have to face the challenge of saving a lot later to make up for lost time and money!
Compound interest - why it is bad to cash out your 401(k) plan:
- Basically, the earlier you start saving, the more years your money has to earn interest.
- Leaving your money to grow in a 401(k) plan or some other defined contribution plan lets you take advantage of compound interest – which is extremely important in building your retirement nest egg.
- Example: a 25-year old individual with a lump-sum distribution of $3,500 from a 401(k) plan will have $95,783 by the age of 67 (age of full Social Security benefits), assuming an 8 percent annual rate of return.
- If you cash out your 401(k), you will have to pay federal and state taxes on the money you take out, plus a possible 10 percent withdrawal penalty on the money.
- And more importantly, you lose the opportunity to increase the amount of money you have in a tax-deferred account.
- Time is running out for many Baby Boomers who will soon reach retirement age.
- Unless they dramatically change their spending, saving, and investing habits – millions of Boomers could face financial hardships in retirement
- People are living longer today and spending more time in retirement.
Unexpected income changes in retirement
- Most retirees will have to live on a fixed income consisting mainly of Social Security benefits and a pension check. No longer will there be annual raises, bonuses, or overtime pay.
- Prepare for higher healthcare costs, including out-of-pocket expenses for prescriptions and doctor appointments.
- Add extra money in your retirement budget to pay for federal and state income taxes, just in case you don’t withhold any money from your pension or Social Security checks.
- Find out how much your Social Security benefit will be.
- Develop a retirement financial plan that lists all your expected monthly income and monthly expenses.
- Consider consolidating your IRAs.
- Max out on all of your eligible tax-deferred retirement savings (e.g., 401(k) plan, IRAs).
- Try to pay off your mortgage so you’ll own your home when you retire.
- Take stock of your current income and resources.
- Re-adjust your spending habits so you have more in savings (e.g., give us some luxuries like going out to dinner or buying a cappuccino every day, etc.).
- Read all the statements you receive from your pension fund, 401 (k), or IRA to catch mistakes before it’s too late.
- Get help from a financial expert or consider enrolling in a money management class (e.g., learn how to invest, etc.).
- Depending on your financial situation, you may have to delay your retirement or take on part-time work for additional spending money.
Resource: The Retirement Catch-Up Guide by Ellen Hoffman (www.retirementcatchup.com)
- Find out about your Social Security benefits. Call the Social Security Administration at 1-800-772-1213 for a free Social Security Statement or visit www.ssa.gov .
- Learn about your employer’s pension or savings plan. If your employer offers a plan, check to see what your benefit is worth. Most employers will provide an individual benefit statement if you request one.
- Find out what will happen to your pension before you change jobs. Learn what benefits you may have from previous employment, and find out if you will be entitled to benefits from your spouse’s plan. If you do change jobs do not take a lump sum distribution, either move the money to a rollover IRA or to a new employers plan.
- Ask about the Roth 401(k) if you would prefer to pay taxes now but not have to ever worry about them in the future.
- Put money into an Individual Retirement Account (IRA).
- Don’t dip into your retirement savings. You’ll lose principal and interest, and you may lose tax benefits. If you change jobs, roll over your savings directly into an IRA or your new employer’s retirement plan.